Feroz1888 Mills Limited (PSX: FML) was incorporated in Pakistan as a public limited company in 1972. The company is in the business of manufacturing and exporting specialized yarn and textile products categorized into bath, beach and kitchen products. Besides having an export market in over ten countries across the globe, FML also caters to the needs of local market. The company is partnered with 1888 Mills (USA) and has its manufacturing units in Sindh and Balochistan.
Pattern of Shareholding
As of June 30, 2022, FML has a total of 399.409 million shares outstanding which are held by 1204 shareholders. Directors, CEO and their spouse have a major stake of 34.19 percent in FML with General public running a close second with 33.54 percent shareholding. Associated companies, undertakings and related parties hold 23.78 percent shares of FML while Banks, DFIs, NBFIs and Insurance companies collectively hold 5.99 percent shares. Joint stock companies account for 2 percent of FML’s outstanding shares while Investment companies and Mutual funds have the smallest stake of 0.51 percent in the company.
Performance Trail (2018-2022)
The toplineof FML has been growing in all the years under consideration. However, in comparative terms, 2020, with a skimpy sales growth of 6 percent year-on-year proved to be a slow year for all the obvious reasons (read: COVID-19). 2022 also posted a relatively meager topline growth of 15 percent year-on-year. In 2020 and 2022, the bottomline of the company also took a plunge. The margins of FML which had peaked in 2019 also started dipping thereafter with a trivial uptick in 2021. A sneak into the financial statements will reveal the underlying details.
In 2019, the topline of FML posted a tremendous 35 percent year-on-year growth in revenues. The growth was mainly backed by export sales which grew by 9 percent year-on-year in USD terms and 34.6 percent year-on-year in Pak Rupee terms to clock in at Rs.28.55 billion. Local sales also posted a 21 percent year-on-year growth but in absolute terms, they are much lower than export sales i.e. Rs.395.16 million in 2019. While cost of sales also grew in the wake of inflationary pressure, the gross profit grew by 65 percent year-on-year with GP margin clocking in at 25 percent in 2019 as against 20 percent in the previous year. Operating expenses continue to enlarge with major expense being made in the category of advertising and marketing. Other income gave a major support with a significant growth of 185 percent year-on-year. The growth in other income was propelled by exchange gain on export receivables. As a result, operating profit grew by 121 percent in 2019 to clock in at Rs.6.37 billion with an OP margin of 22 percent as against 13 percent in the previous year. Finance cost rose by 82 percent year-on-year in 2019 because of high discount rate coupled with increased borrowings during the year. FML secured a huge amount of both long-term financing for the import of machinery as well as short-term financing as export refinance facilities during the year.The bottomline boasted a year-on-year growth of 118 percent in 2019 to clock in at Rs.5.989 billion with an EPS of Rs.15.90 as against Rs.7.30 in the previous year. The NP margin stood at 20 percent in 2019 as against 13 percent in the previous year.
As against the new highs achieved by the company in 2019, 2020 was a sluggish year for FML. Both local and export sales came to a halt due to lockdown imposed locally as well as major export destinations of FML during the second half of FY20. The 6 percent year-on-year growth in sales was mainly attributable to exchange rate difference during the year. The cost of sales gave no respite due to inflationary pressure which magnified the cost of raw materials, fuel and power charges etc. The gross profit slid by 4 percent year-on-year with GP margin clocking in at 23 percent in 2020. While administrative and distribution expenses also grew during the year, the major hit came on the back of other expenses which grew by 87 percent year-on-year mainly on the back of exchange differences of export receivables, trade payables and derivative financial instruments. To make it worse, other income didn’t support either and dropped off by 89 percent year-on-year in 2020 as exchange gains were zeroed by exchange losses. The operating profit plunged by 43 percent year-on-year with OP margin standing at 12 percent in 2020. Finance cost also grew as the discount rate was high during the first three quarters of FY20. This coupled with increased short-term and long-term borrowings and lease liabilities jacked up the finance cost by 123 percent year-on-year in 2020. Consequently, bottomline slid by 51 percent year-on-year to clock in at Rs. 2.93 billion with an EPS of Rs. 7.80 in 2020. NP margin dropped to 9 percent in 2020.
The zigzag journey continued as 2021 was a vigorous year after a depressed 2020. 2021 was characterized by 36 percent year-on-year growth coming on the back of both local and export sales. US represent the major export market for the company with a share of 83 percent in the total revenue of FML in 2021.Increased yarn prices, Pak Rupee depreciation, fuel and power cost etc took its toll on the cost of sales which grew by 37 percent year-on-year squeezing GP margin to 22 percent. Operating expenses grew mainly on account of marketing expense, freight, forwarding and insurance charges and market induced increase in employees’ remuneration. Other income and other expense gave some breather as the company reversed the provision for doubtful advances. Operating profit grew by 47 percent year-on-year with OP margin clocking in at 13 percent in 2021. Finance cost continued to grow despite slash in the discount rate as the company’s long-term and short-term borrowings as well as lease liabilities enlarged during the year. The bottomline posted a 47 percent year-on-year growth to clock in at Rs.4.3 billion with an EPS of Rs. 11.30. NP margin clocked in at 10 percent in 2021.
2022 was a difficult year not only for the textile sector but for the economy as a whole. Soaring inflation, sharp depreciation of Pak Rupee, multiple upward revisions in discount rate coupled with import restrictions and subdued purchasing power of consumers were the challenges that began to raise their heads in 2022 and continued even in 2023. The topline of FML grew by 15 percent year-on-year, however couldn’t sustain the rise in cost of sales due to the challenges quoted above. As a result gross profit took a 20 percent year-on-year plunge in 2022 with GP margin clocking in at 15.5 percent. The company has never seen such a thin GP margin since 2014. Other income gave a major support to the bottomline as it multiplied by over 6 times in 2022 on the back of hefty exchange gain. This diluted the decline of operating profit to 11 percent year-on-year which would have been immense had other income not done a marvelous job. OP margin clocked in at 10 percent in 2022. Finance cost which had been growing enormously in the yesteryears grew by 19 percent year-on-year despite multiple rate hikes during the year. The bottomline dropped by 21 percent year-on-year in 2022 with net profit clocking in at Rs.3.4 billion signifying an NP of 7 percent. EPS for the year was Rs.8.76.
Recent Performance (1HFY23)
During 1HFY23, the company continued to face challenges amidst economic headwinds. Its topline, which hadn’t dipped since 2016, took a 7 percent year-on-year plunge in 1HFY23. Lower volumes also led the company to control its cost of sales. As a result, gross profit grew by 3 percent year-on-year with GP margin at 21 percent in 1HFY23 vis-à-vis 19 percent during the same period last year. Other income, once again impressed with its stunning growth of 3.8 times which enabled operating profit to grow by a huge 64 percent year-on-year in 1HFY23 despite drop in sales. OP margin for the period under consideration stood at 16 percent as against 9 percent during the same period last year. Finance cost grew not only because of discount rate hikes but also as FML secured new short-term loans such as FE-25 import loan and term finance loan. The existing export refinance loan also grew during the period. Long-term borrowings and lease liabilities also expanded during the period. The bottomline still managed to swank a 51 percent year-on-year growth despite difficult times. The net profit for 1HFY23 stood at Rs.2.7 billion with an EPS of Rs. 6.85 as against Rs.4.79 during the same period last year.NP margin clocked in at 12 percent in 1HFY23 up from 7 percent in 1HFY22.
Going forward, the sales are not expected to rebound due to softened demand in the export markets of FML particularly, the US which is the major export market of the company. Cost of sales would continue to haunt as cotton prices are showing an unabated rise, hovering in the range of Rs.22,000 per maund owing to flash floods. Amidst sharply depreciating Pak Rupee, significant exchange gain can rescue the bottomline from further crash and provide the much needed strength to the margins.